Three University of Luxembourg researchers say they have identified techniques that can be used to determine the identity of anonymous Bitcoin users for between 11 percent and 60 percent of all Bitcoin transactions, "depending on how stealthy [the] attacker wants to be." Deanonymizing a Bitcoin user means tying their pseudonym - which serves as a public key - to the IP address from which they trade bitcoins. The researchers say their attack requires only about $2,000 worth of equipment.

The researchers also say they can defeat users who attempt to hide behind firewalls or network address translation. By "abusing" Bitcoin countermeasures designed to block distributed-denial-of-service attacks, the researchers say they can also unmask up to 60 percent of Bitcoin users who employ the Tor anonymizing network in an effort to mask their IP address.

The deanonymizing method opens up new ways for law enforcement agencies to tie transactions to an IP address, and perhaps back to the identity of a criminal, says Alan Woodward, a visiting computer science professor at the University of Surrey, as well as a cybersecurity adviser to Europol. "Good, old-fashioned policing - a lot of it is about following the money," he says. To that end, Europol - short for the European Police Office, which coordinates criminal intelligence across the EU - has been forging stronger ties with European banks to help it better identify and trace crime-related funds.

But criminals have increasingly been tapping cryptocurrencies to try to hide their tracks, at least when it comes to receiving funds via so-called darknet sites - where everything from child pornography to illegal narcotics can be ordered - to demanding shakedown payments from victims. "Although generally designed for legitimate use, virtual currencies are heavily abused by cybercriminals," notes Europol in its September 2014 Internet Organized Crime Threat Assessment.

"Bitcoin is beginning to feature heavily in police investigations, particularly in cases of ransomware and extortion," Europol's report says.

Information security expert Mikko Hypponen, who's the chief research officer for anti-virus vendor F-Secure, based in Helskinki, Finland, warns that the Islamic State, better known as ISIS or ISIL, may be funded in part by bitcoins. "ISIS also operates sites in the deep Web - Tor hidden services - that are asking for donations for the Islamic State in bitcoins."

No Promises

From a technological standpoint, the Bitcoin project has never promised absolute anonymity, warning that every related transaction gets publicly logged, which means that, over time, transactions might be tied to specific wallets, and wallets back to people. The Bitcoin project also recommends that users regularly change their pseudonyms to foil tracking.

Alan Woodward, a cybersecurity advisor to Europol, on the impact of deanonymizing Bitcoin transactions.

But now, researchers are reporting that up to 60 percent of transactions can be tied to a specific IP address in the lab. "Bear in mind that's what some academics in universities have achieved," Woodward says. "It's not necessarily what various others - who have more resources to put at it - are able to achieve." Indeed, imagine what happens if the U.S. National Security Agency, U.K. GCHQ, and their fellow intelligence agencies bring their processing power to bear on deanonymizing Bitcoin transactions.

Thus, it's likely that criminals will adopt new types of cryptocurrency, Woodward says, including Darkcoin, Dark Wallet and the forthcoming Zerocoin, all of which have been designed by privacy aficionados to try to improve on the Bitcoin model. Cryptocurrency fans have even crowdfunded a source-code review of the Darkcoin code.

Such moves haven't gone unnoticed by law enforcement agencies, which worry about tracking criminal transactions, and especially money-laundering. "We feel it should concern everyone that the latest cybercurrencies are intended to be truly anonymous and to facilitate anonymous transactions," Europol's threat assessment warns. "We face a situation where law enforcement may be completely unable to trace even very large criminal transactions."

The latest generation of cryptocurrencies "can have no other purpose than just to stay totally anonymous," says Woodward, who co-authored that Europol report. "You look at it and think, now why would anyone want that, except to conduct a criminal activity?"

About the Author

Schwartz is an award-winning journalist with two decades of experience in magazines, newspapers and electronic media. He has covered the information security and privacy sector throughout his career. Before joining Information Security Media Group in 2014, where he now serves as the executive editor, DataBreachToday and for European news coverage, Schwartz was the information security beat reporter for InformationWeek and a frequent contributor to DarkReading, among other publications. He lives in Scotland.

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